Year 11 | Economics ATAR Unit 1

Economics

the study of how people make decisions with limited resources

Economic Problem

Unlimited wants/needs v.s. limited resources to fulfil them

Questions of Economics

- What to produce?

- How to produce?

- For whom to produce?

positive statement

A statement that is able to be definitely proven right or wrong by using facts and investigation

normative statement

A statement which relies upon opinion which cannot be proven right or wrong

factors of production

Land, Labour, Capital and Enterprise

Land

all natural resources used to produce goods and services

labour

productive work (especially physical work done for wages)

Capital

goods used to produce other goods

Enterprise

The ability to combine land, labour and capital resources to create, plan and produce goods and services.

perfect competition

a market structure in which a large number of firms all produce the same product

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Oligopoly

A market structure in which a few large firms dominate a market

Monopoly

A market in which there are many buyers but only one seller.

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

market economy

Economic decisions are made by individuals or the open market.

planned economy

economy that relies on a centralised government to control all or most factors of production and to make all or most production and allocation decisions

demand

the quantity of a good or service that consumers are willing and able to buy

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

income effect

the change in consumption resulting from a change in real income

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other, similar goods

Taste and Prefernces

What consumers actually desire and will purchase. e.g. fashions and trends change

Income

The larger the disposable income of a population the more they can/willing to buy

Demographic

the makeup or composition of a group of people, based on a shared feature, effects what and how much they demand

Expectations of consumers

How consumers feel about the future. Will the price go up or down tomorrow? Should I buy now or later?

Price of related goods

substitutes: an in increase price, people will substitute to a similar product.

compliments: an increase in price, base good will be less attractive.

supply

the amount of goods producers are willing to make and sell

Law of Supply

producers offer more of a good as its price increases and less as its price falls

Price of other goods

A producer could potentially redirect its resources to produce a more profitable good.

Expectations of producers

What is going to happen to the price in the future? Should i withhold stock? Should I dump it into the market now?

number of sellers

More sellers in the market increase the market supply. This results because a market is profitable and they want a "slice"

Technology

Changes in the method of production to make it more efficient

cost of production

The total cost of land, labor, capital (F.O.P.) and other inputs required in the manufacture of a product

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in price

Elastic

describes demand/supply that is very sensitive to a change in price: Eₓ > 1

Inelastic

Describes demand/supply that is not very sensitive to a change in price: Eₓ < 1

unitary elastic

describes demand/supply whose elasticity is exactly equal to 1: Eₓ = 1

elasticity of demand

a measure of how consumers react to a change in price

availability of substitutes

The demand for a good is elastic if a substitute for it is easy to find.

The demand for a good is inelastic if a substitute for it is hard to find.

necessity or luxury

People will buy necessities regardless of price (inelastic) but may only buy luxury products if their prices falls (elastic)

Proportion of Income

The higher the price of a good relative to consumers' incomes, the greater the price elasticity of demand.

Definition of the Market

the more narrowly we define a market, the more elastic demand will be e.g. fuel prices are inelastic but Caltex diesel prices are elastic

time

If consumers can respond quickly to changes in price it will be more elastic. vise versa

income elasticity

A measure of how sensitive consumption of good X is to a change in a consumer's income

Normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

Cross Elasticity

A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.

Cross elasticity of complimentary goods

Negative cross elasticity. As the price of one good goes up less is demanded of it's compliment e.g. petrol prices go up less cars are demanded

Cross elasticity of Substitute goods

Positive cross elasticity. As the price of one good goes up more is demanded of it's substitute because people switch. e.g. margarine prices go up, more butter os demanded.

supply elasticity

a measure of the way in which quantity supplied responds to a change in price

time

how quickly a producer can respond to changes in price

Nature of the industry

Some industry may have to less flexibility in their distribution. e.g. agriculture has to sell their product regardless of price, there it's inelastic.

Ability to store inventory

Storage facilities can be outlets and bottlenecks for supply, meaning producers are able to decide when to sell a product.

Market Efficiency

When a market is able to allocate it's finite resources to maximise total welfare

marginal cost curve

Another name for a supply curve

marginal benefit curve

Another name for a demand curve

consumer surplus

The benefit a consumer receives from the consumption of a good. It is the difference between the maximum (marginal benefit curve) amount they would have paid for a good and what they actually pay (Equilibrium price).

producer surplus

The benefit a producer receives from their good being consumed. It is the difference between the minimum amount they would be willing to receive (marginal cost curve) and what they actually receive (Equilibrium price).

total surplus

The total benefit or welfare that is created when an interaction in a market takes place. consumer surplus + producer surplus.

dead weight loss

The reduction of total welfare when the market is not operating at maximum efficiency

price ceiling

A form of price control set below the equilibrium to make a product more affordable. Thye increase consumer surplus, decrease producer surplus and create a DWL

price floor

A form of price control set above the equilibrium to make a product more profitable. They increase producer surplus, decrease consumer surplus and create a DWL

tax

When the government receives revenue from a market interaction, creates a DWL. The burden of the tax can be placed on either consumer or producer or both.

subsidy

When the government values an industry they will give it money to make a product cheaper and easier to produce it. Creates a surplus and a DWL placed on the government

Equity

The question of whether a market is fair. Markets that are efficient reward those with more resources

verticle equity

the idea that taxpayers with a greater incomes should get larger taxation

horizontal equity

Deals with people of the same level of wealth. People who have the same income should pay the same tax

market failure

a situation in which a market left on its own fails to allocate resources efficiently

forms of market failure

Market power, Externalities, public goods, common property goods

market power

the ability of a company to notably change prices by adjusting only their own output.

Externality

The unintended consequences placed on society when a market interaction takes place, they can have a positive or negative effect.

conditions of an imperfect market

Relatively small number of firms, large amount of market power, using product differentiation, barriers of entry restrict competition.

anti-competitive behavior

when a producer uses substantial market power to harm competitors

Cartel

Two firms colluding instead of competing. e.g. price fixing

market sharing

A market is divided into a series of smaller markets, each supplied by one of the firms, thus reducing competition.

Predatory pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market

merger

Combination of two or more companies into a single firm to reduce compeition

rival in consumption

the same unit of the good cannot be consumed by more than one person at the same time

nonrival in consumption

if more than one person can consume the same unit of the good at the same time

excludable good

a good for which it is easy to prevent consumption by those who do not pay

nonexcludable good

the supplier cannot prevent consumption by people who do not pay for it

private goods

goods that are both excludable and rival in consumption. e.g. clothes, food, iPhones

club goods

goods that are excludable but not rival in consumption e.g. Netflix, Spotify premium, gym membership

common resource goods

Rival but non excludable

ex: fishing, hunting, public campsites

public goods

Goods that are neither excludable nor rival in consumption. They are usually supplied by the government through tax revenue. e.g. light houses, national defence, roads

Tragedy of the Commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

free rider

a person who receives the benefit of a public good but avoids paying for it. e.g. kids playing at a public park

Merit goods

Goods that could be supplied privately but the community values them more than the individual consumer, there is a shortage. The government will step in and provide these for free. e.g. public health, public education, public transport